Outcome of Constitutional Referendum in Italy Could Spell End of Euro
The Constitutional Referendum in Italy is coming. What effects can investors expect in the international markets, and especially, on the euro?
The short answer is that should voters accept constitutional reform, voting “Yes,” as Prime Minister Matteo Renzi hopes, the euro will take off. The EURUSD will reverse course from the current near-parity level.
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But, should Italians vote “No” in the referendum, the result could be catastrophic for the euro and for European markets. A “No” result in the December 4 constitutional referendum could signal the first steps that Italy takes out of the euro. Indeed, the eurozone itself would struggle to survive. The EURUSD exchange may drop to well below parity before Christmas.
Some time ago, Forbes had spoken of the possible consequences of a victory of the “No” side in the referendum. Italy’s exit from the euro currency—but not the European Union (EU)—was given as a strong possibility. Italy is one of the founding members of the EU. (Source: The Italian Referendum Could Result in the Death of the Euro, Forbes, Aug.31, 2016.).
Only Credit Suisse Group AG (ADR) (NYSE:CS), the investment bank, has offered less drastic scenarios in the case of a “No’”vote. The bank sees only a slim chance of Italy slipping out of the euro. But most international financial observers seem convinced that the constitutional referendum in Italy could trigger greater economic and political consequences than did the Brexit. (Source: “Cloudy Sky over Italian Banks,” Credit Suisse, August 15, 2016.)
No Vote Could Mean “Italexit” and Collapse of Eurozone
In general, the international financial establishment fears the effects of a “No” victory in Italy’s referendum. The euro currency is not the only victim. The shock could be so high as to lead Italy out of the EU itself: an “Italexit.”
The United Kingdom does not belong to the eurozone.
Matteo Renzi has repeatedly linked the outcome of Italy’s referendum to his tenure. He has tried to dismiss this hypothesis, but not very forcefully. That’s why the fear of a political and economic crisis has surpassed the Brexit.
Should the vote be “Yes,” however, Renzi could end up with one of the strongest Italian governments ever. A “Yes” victory in the referendum would certainly make the Italian market attractive. Italian bonds would rise in demand. A “Yes” result in the referendum would signal that the populist anti-euro parties are losing steam.
Italy would also be seen as politically stable in the eyes of foreign investors. It would drive off fears of early elections until at least 2018. Indeed, the Italian constitution prevents a direct vote on EU or euro membership, but a government with a popular mandate can lead Italy out of the eurozone.
If Italy leaves the eurozone, it’s time to bring out the end credits of the Warner Bros. cartoons: “That’s All Folks.”
There is a milder scenario, nevertheless, even in the case of a “No” win. Prime Minister Renzi resigns, but the President of the Republic—the Italian head of state—rejects his resignation. Thus Renzi would get an effective mandate to govern until the next scheduled election in 2018.
This hypothesis would not be too detrimental to the banks. It would therefore only have a temporary effect on the euro and for the major eurozone stock exchanges. These include Milan, Frankfurt, and Paris. Volatility could rise, but only in the days immediately following the December 4 referendum. The EURUSD could hit parity, but not fall much below that.
Should Renzi be out, though, it would result in a collapse of domestic and foreign investment in Italy. This would have serious implications for employment, and thus repercussions on the level of domestic consumption. Italy would not even have to ask to leave the euro; it would slip out. The outcome of the Italian referendum shall determine the very future of the eurozone.
